Fitch again affirms Israel’s A+ credit rating, warns of overhaul’s potential damage

Netanyahu and Smotrich hail move as proof that economy is ‘strong, stable and resilient,’ and say warnings about overhaul impact are alarmist ‘false panic campaigns’

This photo shows signage for Fitch Ratings, in New York, October 9, 2011. (Henny Ray Abrams/AP)
This photo shows signage for Fitch Ratings, in New York, October 9, 2011. (Henny Ray Abrams/AP)

Fitch Ratings on Monday affirmed Israel’s A+ credit rating with a stable outlook, as it did in March, but continued to warn of fallout if the government advances additional parts of its overhaul of the judiciary.

Prime Minister Benjamin Netanyahu and Finance Minister Bezalel Smotrich — who have rejected repeated warnings by economists that the contentious overhaul would severely damage the economy — hailed the announcement as proof that such forecasts were alarmist.

In a joint statement, the pair said that the decision “proves what we have repeatedly said from the start — Israel’s economy is strong, stable and resilient thanks to our responsible and conservative policy.”

“When examining the true data on the Israeli economy, the resulting picture is the opposite of the one some are trying to create via false panic campaigns in the news networks,” the statement said.

In its report, Fitch said the high rating “balances a diversified, resilient and high value-added economy and strong external finances against a relatively high government debt/GDP ratio, ongoing security risks and a record of unstable governments that has hindered policymaking.”

Echoing claims made by Netanyahu in interviews with international media, Fitch said: “The government’s initial judicial overhaul package has been watered down but remains highly controversial and faces strong civil society and political opposition.”

Anti-overhaul protesters rally against the government’s judicial overhaul in Tel Aviv, August 5, 2023. (Gilad Furst)

Netanyahu indicated last week that his government would shelve much of the overhaul, but not before moving ahead with the most far-reaching and controversial measure in the judicial shakeup package — changing the composition of the Judicial Selection Committee. He intimated that he was still seeking consensus on this.

The government has already passed the “reasonableness law,” which bars judicial review of government and ministerial decisions on the grounds of their reasonableness.

Fitch noted these moves and cautioned they could still impact the economy.

“Fitch believes the changes may have a negative impact on Israel’s credit metrics if the weakening of institutional checks leads to worse policy outcomes or sustained negative investor sentiment or weakens governance indicators,” the report said.

But on a more positive note, it added: “Fitch considers the current measures are unlikely to trigger a material exodus of talent and capital in the high-tech sector.” This is despite growing talk of a brain drain and relocations, trends that have yet to materialize.

Fitch projected “growth of about 3.1% of GDP in 2023 and 3.0% in 2024, below the Bank of Israel’s (BOI) estimate of potential at around 3.8% per year and after 6.4% in 2022, due to base effects, slow global growth and tight monetary policy.”

Regarding Israel’s mounting inflation, Fitch predicted it will “continue to slow until the end of the year as import prices drop and endogenous inflation slows with a moderation of consumption and investment.”

Fitch’s rating comes some three weeks after rival credit rating agency Moody’s Investors Service warned about “negative consequences” and “significant risk” for Israel’s economy and security situation following the passage of the first bill of the government’s contested judicial overhaul.

Anti-overhaul activists protest against the government’s judicial overhaul, in Tel Aviv, on August 5, 2023, with a sign likening Prime Minister Benjamin Netanyahu to crime boss Pablo Escobar. (Avshalom Sassoni/Flash90)

In April, Moody’s lowered Israel’s credit outlook from “positive” to “stable,” citing a “deterioration of Israel’s governance” and upheaval over the government’s bid to dramatically overhaul the judiciary.

Netanyahu and Smotrich were less welcoming of Moody’s report. The government put out a statement at the time rebuffing it as a “momentary response,” adding that when the “dust settles it will become clear that Israel’s economy is very strong.”

Other credit rating agencies, including Standard & Poor’s, have been warning in recent months about a deterioration in Israel’s governance and the potential weakening of the judiciary and institutional strength, and raised concerns over heightened domestic social and political tensions.

The main concern in the business and tech community is that the proposed judicial overhaul will erode democracy and weaken checks and balances, which will make venture capitalists and other money-makers leery of investing their money in the country, triggering an outflow of funds.

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